Don’t foil your intent with a so-so estate plan

Photo: JessicaGale/

Morris, 51, earns the kind of salary most New Jerseyans envy.

But he fears he could lost his job, and if he does, he’s not sure how he will maintain his family’s lifestyle.

His wife Shondra, 48, earns a small salary, and the couple has one child starting college in the fall and another who is 16.

Morris says he needs a plan that will be “some combination of lowering expenses, paying off mortgage, supplementing with income from my assets and working in a lower paying job.”

If his current job remains, Morris would like to be financially secure enough to retire at 55, and then work part-time in a more flexible position. And in retirement, the couple would like to spend some winter months in Florida.

The couple’s other goals include funding college for their kids, but giving them a little skin in the game with less than $20,000 in student loans. They’d also like to pay off their mortgage in seven years.

Morris and Shondra have accumulated significant assets to help them reach their goals.

They’ve got $1.196 million in IRAs, $1 million in mutual funds, $170,000 in money markets, $5,000 in savings and $25,000 in checking. Morris’ new 401(k) plan has a balance of $20,000 and he saves $2,000 a month to the account, which is matched by his employer. They’ve also socked away $253,000 in 529 plans for college.

When Morris reaches age 55, he’ll receive a pension worth about $12,000 a year.

Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton, reviewed the couple’s finances for

“The goal is to stop Morris’ `real job’ and move into a position where their quality of life is better, they make enough income to pay their bills and so their savings continues to grow until Morris hits full retirement age of 67,” Lynch said.

Their high net worth will help this to happen, but they got there because they live below their means and they’ve saved and invested over the years, Lynch said.

“If you do those two things well, it is amazing how easy this makes any planning,” he said.


Longevity planning needs to be a big part of the couple’s plan.

It’s reasonable to think that at least one of them — Morris or Shondra — will still be alive in 40 years, Lynch said.

“A lot can go wrong over 40 years, especially if you are living off your investments,” Lynch said.

That’s why a proper estate plan is essential.

Lynch said there are two critical components to a good estate plan. First, having the proper documents prepared by a full-time estate planning attorney, and second, having the correct beneficiary designations and titling of assets.

Lynch offered this scenario.

“Let’s assume you have F. Lee Bailey do your legal documents. They address every possible situation that you or your heirs may face in the future,” Lynch said.
“There are trusts set up for your wife and kids and everything is perfect. After they are signed, you put them in the file cabinet and worry about the next project. You feel real good about yourself in accomplishing this project.”

But Lynch said that’s not the reality. You actually wasted a lot of time and money, and didn’t accomplish anything of value. Why? Because none of your money is going through your will.

That’s because if you look at the average married couple, the largest assets are usually real estate owned jointly with rights of survivorship, IRA and 401(k) accounts, life insurance and joint taxable investment accounts.

Lynch said these assets are generally do not go through a will.

Instead, property owned jointly with rights of survivorship will automatically go to the other spouse and not through the will. Life insurance has a beneficiary designation and goes directly to that individual, as will IRAs and 401(k) plans.

“So with these three examples just given, which generally comprise 90 percent of your estate, none of these go through your estate planning documents unless you make them,” Lynch said. “So how do you do that?”

Lynch said after you complete a will, you need to make beneficiary changes to make sure your life insurance, IRAs and 401(k)s work with your estate plan. In many cases, you’ll want those assets to transfer to a trust rather to the individual currently named as beneficiary.

Trusts are a tremendous planning tool that can really protect assets, he said.

When Morris and Shondra created their estate plan, they thought they did the right thing. But, Lynch said, they did not change any of the titling of their assets or beneficiary designations, “so their documents are almost worthless.”

They should return to a qualified estate planning attorney to review their documents and see how the titling of their assets should change. They could even change the titling on their home to have the best result for the future.


One of the couple’s children will start college in the fall with a price tag of $46,000 a year, or $190,000 total.

Their 16-year-old could also end up at a private school, costing as much as $60,000 a year, or $240,000 total.

That compares to Rutgers, which would cost around $27,000 a year or $108,000 total.

Lynch said the expected college choices for the kids will end up costing more than $214,000 more than Rutgers would for both kids, with no guarantee the kids would have a better education or earn more. He said if you’re talking Stanford, Yale, Princeton or Harvard, the higher costs will pay you more on the back end because of networking. But that’s not the case for most other private schools, he said.

So even though they have significant college savings, Lynch wants to point out how hard it is to pay for that additional cost over the price of a state school.

For this couple, because of the taxes they pay on their income, they’d need to earn $350,000 to end up with the extra $214,000 to fund private schools.

“The good news is they can afford it so it will not stop them from their plans, but it is a tremendous amount of extra money versus an in-state school,” he said.

Lynch looked at their 529 plans and saw how they could do better.

There are generally there are two kinds of 529 plans: direct and advisor. The biggest difference is usually the fees, with the advisor plan being more expensive — a cost Lynch thinks is unnecessary.

“Most 529 plans run on auto-pilot, meaning that they are age-based, and the advisor really does nothing,” Lynch said. “For this I would prefer that you use no-load direct plans as the advisor is really not doing anything.”

He said 90 percent of the advisor plans he’s seen haven’t been worth the extra costs.

And yes, this couple’s plans are advisor-based.

“They are paying an additional $2,000-plus per year with no real interaction from the advisor,” he said. “The more they save, the more it costs them. They have over $250,000 saved for college which is great, but I would rather have them in a lower costing plan.”


Living in New Jersey, while it may mean a higher salary, also means a far higher cost of living than other areas, even with this couple having a reasonable mortgage.

“In most parts of the country you could live like a king and queen with that amount of money,” he said.

Even if they pay off the mortgage before they retire, their expenses will still be far higher than they would if they moved to a lower-cost state.

“For 2015, Shondra and Morris spent over $100,000 in federal, state and local property taxes,” Lynch said.

They pay high property taxes, but they haven’t been able to benefit on their tax return because they’re in AMT — the Alternative Minimum Tax — which means they can’t take traditional deductions.

AMT cost them an additional $8,634 last year.

Lynch found a few items that could help with some savings.

First, he said, they pay 33 percent in federal taxes, more than 6 percent in state taxes and because their income is more than $250,000, they also pay the 3.8 percent Obamacare surcharge.

They should look at dividend income, of which there are two kinds: Qualified, which is stock dividend income that gets taxed at capital gains rates, and non-qualified, which is taxed as ordinary income. Capital gains rates area more favorable.

They could improve their situation by holding income-producing securities in an IRA so the growth is tax-deferred, Lynch said.

Next, they should look at their carry-forward loss. They have a $39,000 loss, which means they can use $3,000 of it every year to offset gains for their federal tax return, but this doesn’t count for New Jersey. Because they can’t use a carry-forward for New Jersey, they lost a deduction that could have saved them more than $2,300.

To avoid taxes like that, Lynch said they should time their gains against their losses.

“If we have a $39,000 gain, sell that to offset the loss so we do benefit from the loss in New Jersey,” he said. “We can always buy the security back 31 days later to avoid the `wash rules’ if we like the stock.”

Then there’s charity.

The couple gave about $5,000 in cash to charities in 2015, which is a nice federal deduction, but not for New Jersey. And cash, Lynch said, isn’t the smartest way to give because you’re donating money on which you’ve already paid taxes. In this couple’s bracket, they needed to earn a taxable $8,200 to have $5,000 to give to charity.

“How do we make this better? Use appreciated securities so we avoid paying federal capital gains as well as New Jersey income tax,” he said. “This saves you approximately 25 percent of the gain that you are giving them.”

The couple should work with an advisor to create proactive tax strategies to minimize the impact of these higher taxes, he said.

One additional note of concern is a loan Morris gave to a family member for a business.

Lynch said he is always concerned about loans to family and friends.

“When you lend money to a friend or family member, it radically changes the relationship to that of a lender in both the lender’s and borrower’s eyes,” he said. “Often the borrower does not want to hang out with you the way that they did previously as they feel a little strange.”

And as the lender, you may notice things you never saw before.

If your family member gets a new car, sends kids to private school or takes a nice vacation, you might wonder about how they’re spending those dollars rather than use the money to pay you back.

“If you lend to family or friends, you need to go into it with the attitude that it is a gift that you will never get back,” Lynch said. “If you do get paid back, great! If you don’t, it will not be bothering you every time you see your family member.”

Money makeovers offered by should be treated as general advice about personal finance and money decisions. Before you make any changes to your personal financial plan, see a professional who can consider your entire financial situation. If you’d like a free money makeover, email .

Net Worth:


  • Checking: $25,000
  • Savings: $5,000
  • Money Markets: $170,000
  • 401(k) plans: $20,000
  • IRAs: $1,196,000
  • Mutual Funds: $1,000,000
  • 529 Plans: $253,000
  • Primary Home: $675,000
  • Personal Property: $40,000
  • Autos: $8,000


Total Assets: $3,392,000


  • Mortgage: $400,000


Total Liabilities: $400,000
Total Net Worth: $2,992,000


Annual Income:

  • Morris: $275,000
  • Shondra: $4,000


Monthly Expenses:

  • Income Taxes: $6,875
  • Housing: $5,400
  • Utilities: $1,322
  • Food: $1,350
  • Personal Care: $740
  • Transportation: $1,795
  • Medical: $400
  • Insurances: $300
  • Entertainment: $350
  • Charity: $250
  • Vacations: $1,000
  • Gifts: $600
  • Misc.: $300]